Estimating Beta-Coefficients of German Stock Data: A Non-Parametric Approach

Maik Eisenbeiss, Goran Kauermann and Willi Semmler

The European Journal of Finance, 2007, vol. 13, issue 6, 503-522

Abstract: Although the consumption based asset pricing theory appears to be theoretically superior and more elegant than the beta pricing model, in practice the beta pricing model is more widely applied. Indeed, beta pricing models are one of the most widely adopted tools in financial analysis. They readily allow handling systematic risk as priced in financial assets. However, accurately estimating beta-coefficients is not as straightforward as implicitly suggested by Sharpe's standard market model, i.e. simply using the ordinary least-squares (OLS) regression. This is primarily because beta-coefficients cannot generally be assumed to be stable over time. In order to overcome this deficiency, we present and apply a non-parametric estimation technique that allows capturing this time effect and promises both more reliable estimates than obtained with an OLS regression as well as better manageability compared with the existing time-series approaches dealing with time-varying beta-coefficients. Estimation results for constant and time-varying betas are presented for portfolios of German industries.

Keywords: Systematic risk; time-varying beta-coefficients; non-parametric estimation; spline smoothing; varying-coefficient model (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (11)

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DOI: 10.1080/13518470701201405

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